Jobs data: Big growth predictor or false indicator?

It is numbers day again, the day where the Labor Department reports last month’s unemployment figures to much fanfare.

This month, clues will be looked for to determine if the economy is heading into recession, after the Commerce Department released data last week that showed the economy shrinking by a startling .7 percent in the first three months of the year.

Some economists blamed the slump on a cold winter. But this is hard to reconcile with the establishment survey jobs reports for the first quarter which showed continued robust growth of more than 500,000 jobs in the first three months of the year based upon their seasonally adjusted data. That’s more than half a million jobs created in the face of a major drop in our nation’s economic activity.

Where was the disconnect?

It is in the seasonal adjustment that the Department of Labor uses. Without this manipulation, the raw data shows a real drop of 1.2 million jobs created in the first quarter of 2015. Exactly what one would expect in a shrinking economy. Effectively, the Labor Department seasonally adjusted away this drop and added more than a half million more jobs into the equation to boot.

This is not to be construed as to imply that there is malfeasance in the adjustments, but instead to warn that statistical formulas that change the raw data can often hide what is happening in the economy as a whole. Seasonally adjusting is not a bad thing. Statistically evening out the impact of the end-of-school-year labor force surge makes sense, as both teachers and students hit the summer job market at the same time creating an artificial, predictable increase in the labor workforce, and a drop in those who are employed. By adjusting for this phenomenon, you get a real picture of the job market rather than one distorted by expected events.

However, these adjustments are based upon past experience and, as a result, are imperfect, as situations change. For instance, the shifting end of the school year isn’t perfectly incorporated into the formulas, so if more college students get out of school in early May than later in the month as before, it can trick the adjustment system. This is why the jobs report that has just come out is rife with potential distortions in both the raw and the adjusted data.

Adjusting aside, in reviewing the raw data from April, there is some good news. The jobs report from last month indicates that all of the job losses from the first quarter have been recovered, giving some credence to the weather slowdown explanation for the first quarter’s economic growth dip.

Now, looking at the April and May raw data and the number of jobs created in aggregate, the private sector astoundingly created more than two million jobs in that two-month stretch, while the seasonally adjusted data shows growth of around half a million jobs over the period.

If the raw data serves as the same type of predictor about the second quarter economic growth as it did for the decline in quarter one, expect robust growth numbers to come out next month. However, readers’ enthusiasm should be tempered by the fact that our economy has not grown by even three percent over the course of a year in more than a decade, and everyone from Goldman Sachs to the Federal Reserve predicts that it won’t break that negative trend this year either.